Litigation funding
Introduction
Litigation is expensive. Whether that is a case brought by a creditor seeking to recover a disputed debt, by a creditor pursuing a director (for example, under the terms of a personal guarantee, or where the director is liable as a result of the wrongful re-use of a company’s name), or by an Insolvency Practitioner (“IP”) appointed by the creditors as liquidator or Trustee in Bankruptcy to look at ways to get their money back, that cost creates potential barriers. How that cost is funded needs careful consideration.
I am a career insolvency practitioner who has worked closely with creditor services teams at several firms of insolvency practitioners. My aim in this article is to guide creditors through how litigation can be funded, whether brought by them or by IPs they appoint, and to provide an insight to creditors as to the challenges IPs face when funding litigation to maximise returns for creditors, and the decisions they have to make. The total costs of litigating can be broken down into solicitors’ costs, barristers’ costs, Court fees, expert witness fees, other
disbursements and the premium charged by any provider of adverse costs insurance.
Options for funding each of the above costs:
Private client basis
The creditor or IP should consider what costs can be paid from funds they have available, and what may be the impact of spending those funds on litigation. As a creditor, does your business have the funds to pay the costs of litigation or will diverting funds from your core business cause other problems? Does the business want to risk their own funds, knowing that if they are unsuccessful they may be throwing good money after bad? In the case of an IP, do they hold funds from other realisations? If so, are those funds needed for the costs of the insolvency, in which case how will those costs be paid if the funds are used for litigation? If the funds held by the IP could be used to pay a dividend to creditors, should the IP consult key creditors before committing funds to litigation, which if lost will mean the dividend will be reduced or eliminated? Would creditors prefer to invest their funds in the litigation or to receive the dividend and leave the IP to find other ways of funding the litigation? If funds are available, consider using those funds to pay part or all of the costs of the litigation – in many ways it will be the most cost effective solution.
CFAs and DBAs
Conditional Fee Agreements (“CFAs”) are agreements with solicitors and / or barristers whereby part or all of their usual costs are only paid on a successful outcome to the litigation, in return for which they are allowed to apply an agreed uplift of up to 100% to the costs they defer, but with the deferred costs going unpaid if the case is lost. Damages Based Agreements (“DBAs”) are similar to CFAs but with the solicitor and / or barrister being paid an agreed share of the proceeds. Whether either or both of these are available and on what terms will depend on the assessment of the case by the legal team and the appetite of the solicitors and barristers to act on deferred terms. Many barristers, being self employed, are unwilling to act on a CFA basis and so funds will often need to be found to pay their costs or (in the case of a partial CFA) part of their costs. The uplifts need to be taken into account when totting up the costs of litigation. Court fees, expert witness fees and other disbursements will, of course, have to be funded as well.
Deferred insurance premiums
I do not know of many IPs who are willing to issue proceedings without an insurance policy in place to cover them in the event that the case is lost and they are required to pay the costs of the winning party (known as an After the Event (“ATE”)insurance policy) or an indemnity from a reliable third party, such as a well financed creditor. Creditors may be willing to take the risks of having to pay the other side’s costs on cases they run or may also prefer to take out such an insurance policy. Funders will nearly always either need a litigating party to buy from them a product which includes ATE or obtain ATE cover from the market. In many cases the premium will be deferred and will only be payable if the case is won. On occasion funding will be needed to pay up front part of the premium.
When to use third party funding
As noted above, there will often be costs which cannot be managed using the above tools – Court fees, expert witness fees and other disbursements need hard cash (is it to hand?), the ideal barrister for the case may not want to enter into a (full) CFA, the ATE provider may insist on a partial payment of the premium up front, and even solicitors can tire from acting on a full CFA basis in nearly every case and may welcome a part payment of their costs on account as the matter progresses. Third party funding can come into play where either the case cannot proceed without it or for another reason some of the risks of the case need to be shared with a funder. A funder can either provide cash to meet these costs or can take an assignment of the claim and fund the costs of pursuing the claim. When assigning a claim, the creditor or IP will usually only receive a modest payment up front, but can expect to share in the net proceeds in the event of a successful outcome, but the costs deducted from the proceeds and the funder keeping part (usually 50%) of the net proceeds, means the end result will be well below what the claim is worth.
Is the total cost of litigating, including uplifts, proportionate to the claim?
Whilst none of us want to see a recalcitrant debtor or a dodgy director getting away with anything, there will be times when the costs of litigating, including the costs of funding, are not proportionate to the value of the claim. Then we have to pause and consider why that is and what, if anything, can be done to achieve a better balance of costs v benefits. Could a complicated claim be structured to only target the largest part or the “simplest” part? If so, can other elements be brought back into play during any negotiations or mediation? Would narrowing the claim be something you / the IP may regret further down the line? Can the costs and / or uplifts be adjusted so as to bring matters into proportion? If not, can you / the IP simply build pressure without issuing proceedings, by working with the legal team on a CFA basis, and seek an offer? Mediation, without prejudice meetings, and good old fashioned pre issue exchanges of correspondence can work – I know most of us will not want to simply close the file.
Third party funding
Determine which parts need third party funding
So, you / the IP have explored all options for funding each part of the litigation costs and there is a costs budget to take the case all the way to trial (and beyond – to a recovery). Is there a missing piece in the jigsaw which makes up the total funding needed to litigate this claim? What piece or pieces is that? What is the funding need? Can the value of the claim justify the uplifts on those needs (see earlier on proportionality)? This is when third party funding can come into play.
Funders’ criteria vary – identify the right one for your / your IP’s case
There are many third party funders in the market. Each has a different target case type / size / market – each will have their own set of criteria. For many of us, litigation funding is still an unknown, or a very rare part of our work. As the concept becomes better understood the options will become better known. If you are not familiar yet with the options then speak to your solicitors / IP contacts. Even if you do not have a case which needs funding, start the conversation, get comfortable and knowledgeable about the options. Then, when you / an IP have a case which needs funding, you / the IP can approach the best suited funders / brokers / advisors and find a solution which lets the case proceed.
Creditors can act as a funder, but need to understand the risks – if they fund an IP and the IP loses the case then the funds are lost and the creditor may then be at risk of an adverse costs award being made against them. A creditor providing funding is as entitled to seek a commercial return on their funding as is a commercial funder and can insist on an ATE policy being put in place to provide them with protection.
Most funders (and indeed any creditor being asked to fund a case) will need to understand the following:
- The merits of the case, perhaps set out in an opinion from counsel;
- Recoverability – how will the claim be enforced against the respondent(s) / the assets being argued over?
- Costs budgets (not just to trial – but including to enforcement and recovery) – what is the total cost of the litigation and how is each part to be funded? Is the funder happy with the relationship between costs and the value of the claim?
- ATE – either included within their funding offer or a policy in place with an ATE provider, with terms acceptable to a funder, including anti avoidance provisions;
- Inter parties correspondence – so they can get a feel for how each party is approaching the dispute.
Funders fees – DBA or uplift?
The funder will set out their proposed terms. Some funders base their fees on an uplift on the sums committed and / or deployed. Some seek a percentage of realisations – so, like a DBA. Make sure you understand the impact of their fees on your / the IP’s case in a range of different outcomes – if the matter goes to trial, if the matter settles just before trial, if the matter settles soon after proceedings are issued. The costs in all these scenarios should be clearly set out in the term sheet and / or funding agreement.
The funding agreement
When the commercial terms are agreed a funder will table their formal funding agreement, so a party seeking funding will be faced with a long form contract. Can their solicitor acting in the litigation advise them or do they have a conflict? In my view there will rarely be an unmanageable conflict but it needs to be considered. The client of the funder is the creditor or IP and the funded client can then instruct and pay their legal team – so the solicitor is not advising on an agreement which will govern how they will then be instructed, so I see any conflicts as manageable.
A funder (including a creditor asked to fund a case) should not have control of a case – they will though build into the funding agreement some reporting requirements. If the merits of a case change, the budgeted costs are exceeded or the funded party fails to follow the advice of their legal team, you can expect to find clauses allowing the funder to stop funding so they can pause and, if appropriate, renegotiate the terms, or decide to proceed no further. When a case is won the funder will expect to be paid their agreed return – ensure that the trigger for payment is clear – as an IP I would not want to be liable to a funder until the day cash hits my solicitors’ client account!
A couple of other thoughts, from recent Court cases which have an impact on funded cases:
Assignments of claims are allowed
The recent case of Edengate (also referred to as Lock v Stanley) looked at a challenge to an assignment of a right of action by a liquidator. The case specifically sought to question why the liquidator had not offered to assign the claim to the director. The Courts are loath to interfere with the commercial decisions of IPs. Here the Court declined to interfere: the director did not have standing to bring a challenge as they were the respondent to the claim which was being assigned. Although they were a creditor and so could in principle mount a challenge, as the relief sought was contrary to the interests of the creditors as a whole the challenge could not be brought (as the creditor (director) was in effect seeking to stymie a claim against them!). And in any event, for good measure, the Court said that the IP had not been “utterly unreasonable and / or absurd” so the Court would not have interfered even if the director had a valid reason to query what had been done.
Insolvency cases may now incur higher court fees
The recent case of Manolete v Hayward had the unexpected effect of requiring certain insolvency claims (or assignments of claims) to be brought in a way which means larger court fees are now payable, with many cases now attracting the maximum court fee of £10k. That will be a barrier in many cases to an IP bringing an action. Creditors may therefore see more occasions when an IP asks them to assist with funding court fees or turns to a litigation funder.
Conclusion
I hope that you now have a better understanding of how an IP needs to approach funding litigation in insolvency cases, and how creditors can also consider funding direct action against debtors and directors. IPs and funders will be happy to discuss potential cases and to bring their experience to bear.
